Wednesday, October 16, 2013

Why Don't Governments Employ Self-Reported Tax Assessment?

From Japanese Land Reform,

The government initially ordered individual farmers to measure the plots of their land themselves, calculate their taxes, and submit the results to local tax officials. However, difficulties arose with the honesty of the measuring system when the 1874 budget showed that collected taxes fell far below projected values.

The funny thing is that there's a simple algorithm to keep people honest about their own self-reported property taxes. The owner of the property gets to say what the value of the property is, from which the tax is calculated, and if the taxman thinks the value is too low or the owner is dishonest, then he's got the right to buy the property at the price the owner reported. So if you're dishonest, you risk losing 20 to 30 times more than you stood to gain by lying on your taxes. Then of course the taxman sells your land to your neighbours who all laugh at you in contempt.

This is a simple implementation of 'cut and choose'. One person cuts the cake, the other person chooses which piece of cake is theirs. It's perfectly fair and equitable. And almost nobody does this except small children. Preferring instead expensive land surveys. Yuck.

Why do people go for the expensive and complicated solution rather than the simple, cheap and elegant one? Because the elegant solution depends on understanding and manipulating human minds. It relies on redesigning human incentives. And not just exploiting them like psychopaths do (eg, con men, shills and marketers).

In the elegant solution, you neutralize the property owner's greedy desire to cheat by changing that greed to 'keeping his property'. And you further the taxman's desire to make owners pay honestly by giving him the power to totally fuck over property owners (if and ONLY IF they're dishonest, because honest owners won't lose on the forcible sale) as well as give him a narcissistic thrill that he's devouring the property and enlarging himself by proxy (by enlarging the state's holdings).

But effectively redesigning human minds is something that comes naturally only to extremely high Presence Good people. In other words, a maximum of 40% of the population in theory, and in practice 0% of the population. Whereas merely regulating human actions is something that comes naturally to very high Presence non-Evil people. Regulating human behaviour is a much simpler concept for people to process than regulating human thoughts in order to regulate human behaviour.

And I'm aware that Psychopaths SEEM like they do it but they really don't. They just accumulate a bunch of tricks and exploits. Con men don't understand human minds any better than crackers, hackers, and virus writers understand operating systems. They are unable to generate any arbitrary effect.


John Abbe said...

You assert that "honest owners won't lose on the forcible sale" if they report an honest value for their home. This is false, because there would be cases where the taxman buys your property at fair market value when you did not want to move out. The fact that you are fairly compensated in dollars does not make this okay. People would start appraising their own property above market value. Arguably everyone would face this same pressure equally, and taxes could be brought down, and it would all even out. But property prices would be artificially inflated in comparison to other prices, which would probably have other negative effects.

In any case, everyone living with the knowledge that they could be kicked out of their home at any time is probably not a good thing. Part of the problem here is that value is not as objective as you may be assuming.

I don't think this invalidates the general point of your post, but it means that in the real world, theoretically elegant solutions often need to become at least a little (and maybe a lot) more complicated to actually work.

Richard Kulisz said...

HAHA. As if property prices being inflated by property tax self-assessment could be a large problem compared to our inability to build livable cities consciously or deliberately.

Actually, you bring up an interesting argument but you should have stopped at 'forced to move out' because that's where the injustice lies, not in the measures taken by owners to mitigate against it.

I think that if being forced to move out became a significant problem then owners would take some community measures to mitigate against it. Instead of individual measures.

Remember how in the Great Depression communities would collude to pay cents on the dollar for auctioned farm equipment which the banks had repossessed? I believe something very much like this would be made to happen. The owner of the property might not need to move out of it at all.

Something else that might emerge is a system of voluntary mutual vetting. As happened in England between the yeomen. At least before the king decided to turn this voluntary system of vetting into an involuntary system of collective punishment. The former worked, the latter didn't.

Either way, I don't see any insurmountable problems and I certainly don't assume that capitalistic individualism is the solution to everything and anything. Or that an economic analysis is the right take to have. :)

# Part of the problem here is that value is not as objective as you may be assuming.

Indeed. But that's precisely why I object to a centralized surveying office deciding market value.

For added complications to property, consider Community Land Trusts, Land Value Tax, and imposing liens on the windfalls which property owners get whenever a new canal or subway line is built in order to pay off the infrastructure.

During the Haussman renovations of Paris, the city outright expropriated any and ALL buildings near the new boulevards. Thus the CITY benefited financially from the money it invested rather than private property owners as is the case in London. And thus was the city renovated. It brings a new spin to equity and eminent domain, doesn't it?

# in the real world, theoretically elegant solutions often need to become at least a little (and maybe a lot) more complicated to actually work.

Yes. :D And sometimes it's the reverse. Take for instance the setting and disbursement of employment insurance benefits. Obviously the company can't do it because of conflict of interest. But if the government does it then it doesn't make sense because a centralized rate makes no sense at all. Now, if the UNIONS do it, then you've got the granularity right. Each union will have their own rates and payments. And suddenly you've got knock on effects like 1. unemployed people don't feel in conflict AGAINST unions, 2. unions thrive.

In reality, a lot of problems are caused by getting the granularity wrong. By having a centralized solution where a decentralized solution makes more sense. Or having the wrong level of centralization. Or the reverse: having a decentralized solution (eg, wind turbine farms) where only centralization (one big power plant) makes sense.

I believe that practical vs theoretical solutions are a false dichotomy. And that, ugh, "right-sized" and "wrong-sized" are the right dichotomy.

Richard Kulisz said...

In the Japanese case, a lot of problems were caused by the centralized taxmen refusing to believe that people who subsisted from hunter-gathering had low property values. This was "solved" by reducing the tax rate for EVERYONE. Instead, it could all have been avoided and worked itself out by having a decentralized system. Which of course would come with its own little quirks but it's not certain what those would be without implementing it.